Banks. Production

A bank is a producer of money substitutes. It borrows money, reserves a fraction for liquidity and invest the other fraction.

Its main function is to provide liquidity to the money substitutes (near-money) it creates through claims against its borrowings, by the managing of a reserve.

Liquidity refers to how easily (time and cost) assets can be converted into proper money.

Reserved = borrowed - invested.

Currently, near money usually takes the form of checking accounts (demand deposit) and interest-bearing accounts (time deposit).

In addition, banks can create representative money through warehousing (safe deposit).

They also offer the service of money transfer.


Like any other producer, a bank converts time and capital to interest.

Capital good: a tool. Non-final products. Anything that serves to create value indirectly.

Capital in a bank is the part of the business that belongs to shareholders.

Investing: the allocation of savings (stored value) into capital goods seeking for a return.

Trading or speculation: a form of investing in which savings are allocated into final products, in expectation to profit from price changes. (To own in expectation of price increase, also to borrow in expectation of price decrease).

All action is uncertain and, thus, necessarily speculative.

Interest: the return that a producer obtains (because of its investments or its products and services) less the cost of production. The cost of production is the depreciation of its reserve.  


Creation reflects production. Destruction (property depreciation) reflects consumption.

Consumption that produces an economic good is production, otherwise it is the process of either leisure or waste.